1. Field of Invention
This invention relates to an electronic invoicing and collection system and method (EICS) which provides the services of invoicing, facilitating enforcement of customer payment on behalf of the supplier, compiling detailed customer payment histories, and a method of encouraging customers to pay invoices promptly via increased leverage of the supplier, public disclosure of customer payment behavior, and a charitable aspect.
2. Description of Prior Art
A serious problem that disrupts the financial stability of many small businesses is that of late payment by customers. For example, independent contractors--who have a 10% survival rate in their first two years--have been recognized as victims of late payment by their customers. In the U.K., one report on small to medium sized enterprises (SME) cites late payment as a major problem, and another survey revealed that 20% of small firms were threatened with business failure specifically due to late payment. Although late payment is a problem for businesses of any size, small to medium sized enterprises suffer from the lack of legal and financial leverage against their larger counterparts. It is often SMEs, with their less flexible levels of working capital, who suffer the most.
In an investigation of the causes of late payment, it was found that intentional delay occurred in 35% of the cases. This behavior is often adopted by large corporations who carry many outstanding invoices. Payment delay works in two primary ways to benefit the customer: by (1) increasing the working capital of the customer; and (2) providing significant interest earnings on the floating funds. The result is an unethical method of financial gain for the customer at the expense of the supplier. In the U.K., this float amount is approximately .English Pound.20 billion.
In the United States, the impact of late payments is particularly great in the private health care industry, where HMOs and insurance companies routinely pay claims 90 to 120 days late in order to "pay the float". In New York state, one HMO accumulated $238 million in outstanding late payments to health care providers with devastating effects to patients, physicians, and hospitals. Cancer patients were forced to buy their own drugs, and health care providers had to turn away patients, cut back on services, and delay building expansions due to the lack of working capital. It has been found that some of the largest HMOs are the slowest payers, with the three largest together reporting $3.23 billion in accounts payable to hospitals, doctors, and other medical providers at the end of 1996. A settlement with one of the three HMOs was reached only after an aggressive state investigation and a settlement with the Attorney General.
Such behavior is not accepted for customers who are individuals and small businesses in present society. Large corporations, who have ample resources to obtain payment from their customers, have the necessary leverage to enforce payment of invoices and interest charges. As a deterrent against poor payment behavior, companies are able to give customer "bad credit". For example, a utilities company can turn off the electricity or phone service to a customer who fails to pay in a timely manner. Companies with such significant leverage are in the position to enforce strict payment policies on their own terms. The power to designate "bad credit" standing to a corporate customer is not available to individuals, nor are small entities able to make demands to larger companies in ways that enforce payment effectively.
Because large companies have significant resources and well developed electronic information systems, various electronic systems have been developed to simplify payment processing by individual customers to large vendors. For example, U.S. Pat. No. 5,465,206 to Hilt et al. (assignee: Visa International) describes a bill pay system designed for individual customers to pay their bills through a payment network. The Electronic Bill Presentment and Payment (EBPP) service by Microsoft and First Data Corp. integrates banks, billers, and customers through the internet. The EBPP system consolidates bills from a plurality of suppliers for the customer, who may then authorize payment through his or her bank at any time. U.S. Pat. No. 5,483,445 to Pickering (assignee: American Express TRS) describes an automated billing system which consolidates a plurality of company charges for a customer, collects all payments from the customer, and distributes payments to each company. In each case, the systems are designed to facilitate timely payment receipt for large companies, and makes the bill payment process more convenient for individuals.
Electronic systems to ease the payment process for large corporations are in effect, through electronic data interchange (EDI) systems. Using EDI, payments can be made on a timely basis; however, the software is relatively sophisticated and expensive, and thus it is not feasible for many SMEs or individuals to use EDI. Small firms who are able to afford EDI still do not benefit from timely payment from a noncompliant customer, because EDI systems do not provide for any method of payment encouragement or enforcement. EDI systems are used primarily for payment between large companies who have established customer/supplier relations and are often mutually dependent.
SME suppliers often use debt collecting agencies or lawyers to collect payment from a large customer. Although both methods are expensive and time and labor intensive, these types of providers are often the only recourse when a SME needs to collect payment from an uncooperative customer. When the customer is a large corporation, however, the individual or SME is still at a disadvantage. Larger companies can afford substantial legal defense against the smaller entity, thereby maintaining their leverage. Thus hiring a debt collector or lawyer is not always successful nor financially sound for a SME.
Some SMEs wish to avoid jeopardizing the supplier-customer relationship with aggressive collection techniques, and attempt collection themselves. This results in a diversion of management time which would otherwise be spent developing the business itself. This loss in management time starts a downward spiral as both time and funding for investment and growth are lost.
Suppliers often lack effective credit management systems and are thus lenient toward customer payment. In hopes of receiving at least the original invoice amount, the supplier often overlooks the late payment and does not enforce collection of surcharges, even when payment due dates and late payment penalties were previously agreed upon. Customers are able to use the excuse "I never received the bill", or "I sent the payment; didn't you get it?" if there is obviously no way to track invoicing and payment receipt. A small supplier thereby becomes vulnerable to excuses and delays.
Legislation in the U.S. and several European countries provides for statutory rights to interest on late payments. Nevertheless, the problem still exists. This is especially true for small businesses who lack the resources, information systems, and leverage to track and enforce collection of fees. Often, the fees are very small--for example $5.00--and it becomes uneconomical for a small business to put in the required effort to collect small amounts from many different customers. This results in a loss of a large amount of potential income from the sum of many small fees that would accumulate if collection were feasible. Large companies, on the other hand, have ample resources to "nickel and dime" a multitude of customers. Their leverage in collecting these fees manifests itself in their ability to affect a customer in a significant way, such as destroying an individual's credit standing or turning off a utility. Another hindrance to the effectiveness of statutory collection of interest is that many corporations force extension of credit periods, for example from 30 to 90 days, thereby leaving the supplier in the same situation of delayed payment. Recognizing this problem, at least one statutory right to interest proposal in the U. K. includes the right to pursue interest on a late payment for up to six years. Even so, the collection of this interest still could require legal action that may not be cost-effective for a small firm.
One proposal that has arisen in the U.K. is a requirement for all large companies to include their own payment records in their annual reports. Currently, this practice is voluntary. Public disclosure of poor payment records could be enough incentive for companies to improve their behavior, but this proposal does not provide a system for complete, objective disclosure of payment records. In its own report, a company could present the data cleverly and intentionally mislead interpretation while still heeding the disclosure requirement.
A voluntary payment charter has been implemented in the U.K. through which companies can make a "terms of trade" commitment and pledge to quickly address payment delay problems. The reward for becoming a signatory is permission to use the Voluntary Payment logo, a relatively weak point compared to the financial gain available when a customer withholds payment. While this charter has good intentions, it holds no legal weight nor does it provide significant incentive for large corporations to sign the charter and abide by its rules.
Islamic laws of economics prohibit terms of sale that include interest or late payment charges. The exception to this law is the case where the customer is deemed financially capable of paying, yet refuses timely payment. In such a case, once payment is late, the supplier is entitled to compensation. A late payment fee may only be included in the terms of sale in order to deter late payment from a financially capable customer, as long as the fee is allocated to works of charity or the general welfare of society. While this law attempts moral enforcement, it does not provide systems and methods that help SMEs collect payment from customers, especially large corporations.
Ineffective payment collection is a major cause of another problem facing small businesses: that of receiving financing. The biggest cost to financial institutions when dealing with small business loans is debt from failed businesses, failure that is often caused by lack of customer payment. The inconvenience of auditing small business accounts is another significant deterrent for approval of small business loans. This situation presents another case where a small company is put to disadvantage due to ineffective customer payment collection and subsequent lack of resources.